Fed less interested in bond buys: minutes

Stocks, bonds drop after release

WASHINGTON (MarketWatch) — There was less interest in another round of bond buys at the Federal Reserve’s policy meeting in March, according to the minutes released on Tuesday.

At the meeting, only a couple of members suggested that more “quantitative easing” as the policy is commonly known could become necessary if the economy lost momentum.

At the previous policy meeting in January, a “few” Fed members thought the central bank could start adding more long-term securities before long and “a number of participants” indicated they were open to the idea if the economic outlook deteriorated.

There was apparently no discussion at the meeting of any new form of quantitative easing.

The Wall Street Journal has reported last month that the Fed was mulling “sterilized” asset purchases. In this approach, the Fed buys Treasurys or mortgage-backed securities and then issues alternative liabilities to absorb the reserves from the banking system.

Stock markets fell after the minutes were released, and bonds also dropped, as markets interpreted the comments as meaning the Fed was less likely to purchase new securities. The Dow Jones Industrial Average
DJIA, -1.35%
was recently down 98 points to 13,164. Yields on the 10-year Treasurys
TMUBMUSD10Y, +0.07%
rose to 2.22%. Yields move in the opposite direction to bond prices. Read Market Snapshot.

John Canally, an economist with LPL Financial, a platform for independent brokers, said the Fed’s next move depends on the data.

“If the economy isn’t soft enough for QE, that should be a positive” for stocks, he said in an interview.

Steven Ricchuito, chief economist of Mizuho Securities USA, said his takeaway was that the FOMC isn’t in a rush to alter policy in either direction.

The reaction was the reverse of how market participants interpreted a series of speeches and interviews by Fed Chairman Ben Bernanke. In a speech last Monday, Bernanke had welcomed the recent decline in unemployment but said conditions were still far from normal and Fed policy should try to help conditions improve.

He then told Diane Sawyer of ABC News that the high level of unemployment was keeping him up at night.

Operation Twist, in which the Fed is shifting $400 billion of short-term bonds into longer-dated securities, is due to expire in June. Some economists believe the Fed will start a new bond purchase program once Twist expires.

But Eric Green, chief economist at TD Securities, said that based on the minutes, Twist will end without a new program, barring a disappointment on growth.

No ‘material’ bump to economy

In their discussion of the economy at the meeting, Fed officials thought that the economy was a “bit stronger” but not in a meaningful way.

“While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most Fed officials did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014,” the minutes said.

While recent job numbers has been encouraging, a number of Fed officials said there was a risk that improvements could diminish as the year progressed, as happened in the last two years.

This risk “reinforced the case” for the Fed to leave alone its forward guidance that economic conditions are likely to warrant exceptionally low levels for interest rates through late 2014.

Fed members agreed that the date might change if there were “significant changes in the economic outlook.”

Most Fed officials were not worried that inflation could get out of control.

“After the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2% rate” that is their new target, officials said.

Fed officials said that the likely tightening of fiscal policy at the end of the year was one of the headwinds restraining the pace of the economy.

While welcoming policy actions in Europe, Fed officials saw no resolution of the crisis without more steps.

As a result, the possibility of disruptions in global financial markets was still a risk to growth.

The minutes reveal that the Fed discussed more ways to communicate their views to markets but made no decisions.

One idea floated was to include some alternative economic scenarios and what monetary policy responses that might be seen as appropriate under each one. This would clarify the Fed’s likely behavior.

Canally of LPL Financial said he thought the Fed would wait until next year to introduce more changes to how it communicates to markets.

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